Huntington Bancshares Inc (HBAN) 2016 Q3 法說會逐字稿

Good morning, my name is Ruth and I will be a conference operator today.

At this time I would like to welcome everyone to the Huntington Bancshares third quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions)

Mark Muth, you may begin your conference.

Thank you, Ruth, and welcome, everyone.

I'm Mark Muth, Director of Investor Relations for Huntington.

Copies of the slides we will be reviewing can be found on our IR website at www.huntington-ir.com, or by following the Investor Relations link on www.huntington.com.

This call is being recorded and will be available as a rebroadcast starting about an hour from the close of the call.

Our presenters today are Steve Steinour, Chairman, President and CEO; and Mac McCullough, Chief Financial Officer.

Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of the call.

As noted on slide 2, today's discussion including the Q&A period will contain forward-looking statements.

Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties please refer to this slide and materials filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings.

Let's get started by turning to slide 3 and an overview of the financials.

Mac?

Thanks, Mark, and thanks to everyone for joining the call today.

We appreciate your interest and support.

Let me start by acknowledging that the third quarter was a bit noisy, but underneath the noise, we're very pleased with the core financial performance.

As you know, the FirstMerit acquisition closed on August 16.

Under the terms of the acquisition agreement, shareholders of FirstMerit receive 1.72 shares of Huntington common stock, and $5 in cash for each share of FirstMerit common stock.

The aggregate purchase price was $3.7 billion, including $800 million of cash, $2.8 billion of common stock and $100 million of preferred stock.

Huntington issued a 284 million shares of common stock that had a total fair value of $2.8 billion based on the closing market price of $9.68 per share on August 15 of 2016.

We are extremely pleased with the progress we're making in bringing the two companies together as one.

We believe the combination strengthens our Company by improving efficiency, accelerating our long-term growth rate and driving a higher return profile.

We are excited to have the opportunity to introduce our strong recognizable brand, differentiated product set and industry-leading customer service in new geographies and to new customers.

Integration is moving along as expected and our new colleagues are embracing our fair play philosophy and welcome culture.

Turning to slide 3, let's review the financial highlights of our third quarter.

Huntington reported earnings per common share of $0.11, inclusive of $0.11 per share of significant items related to the FirstMerit acquisition, which also impacted the financial metrics I will highlight on this slide.

Tangible book value per share decreased 6% from the year ago quarter to $6.48 per share.

Return on tangible common equity was 7%, while return on assets was 0.58%.

Except where noted, all comparisons to previous quarters are inclusive of FirstMerit, but I want to emphasize that core organic performance continued to meet our expectations.

Compared with third quarter of 2015, revenue grew by 24%, with net interest income up 26% and noninterest income up 19%.

Noninterest expense increased $186 million or 35% year-over-year.

Noninterest expense adjusted for the year-over-year change in significant items increased [$7] million or 14% year-over-year, reflecting the addition of FirstMerit, the accelerated buildout of our in-store channel last fall, and ongoing technology investments.

Our reported efficiency ratio for the quarter was 75%.

However, the acquisition related expense stemming from the FirstMerit transaction added 17 percentage points to the efficiency ratio.

While revenue strength in the quarter, including mortgage banking, capital markets, and a large interest recovery, combined with a $4 million expense benefited from retiring trust preferred debt, lowered the core efficiency ratio by approximately 150 basis points, we are pleased with the progress toward achieving our long-term efficiency ratio goal of 56% to 59%.

Balance sheet growth in the third quarter showed continued organic strength, which was enhanced by the addition of FirstMerit's loan and deposit base.

Average total loans grew 24% year-over-year, with growth excluding FirstMerit coming in at 8%.

Average core deposits grew 22% year-over-year with average core deposit growth excluding FirstMerit registering 3%.

Our third quarter credit performance reflects Huntington's commitment to an aggregate moderate to low risk profile.

Net charge-offs of 26 basis points remain below our long-term financial target of 35 to 55 basis points.

Nonperforming assets improved 21 basis points to 0.72% compared with the linked quarter.

Criticized assets and delinquencies have remained in a relatively tight range for the past several quarters.

Our common equity tier 1 ratio decreased 63 basis points year-over-year and 71 basis points linked quarter to 9.09%, reflecting the impact of the FirstMerit transaction.

Turning to slide 4, and getting more in depth with the income statement, net interest income was up 26% from the year ago quarter as were average earning assets, reflecting strong organic loan growth and the impact of the FirstMerit acquisition.

The net interest margin for the quarter came in at 3.18%, up 2 basis points from the year ago quarter, and up 12 basis points on a linked quarter basis.

Purchase accounting had a favorable impact of 12 basis points on the margin, and we had an interest recovery in the quarter that added an additional 2 basis points.

Noninterest income increased $49 million or 19% from the year ago quarter, primarily driven by the addition of FirstMerit, but also driven by strong organic growth in mortgage banking, service charges on deposit accounts, and capital markets.

Noninterest expense increased $186 million or 35% from a year ago, with significant items accounting for $160 million of the increase.

After adjusting for significant items, noninterest expense increased 14%, primarily reflecting the impact of bringing FirstMerit on for one and a half months in the current quarter.

I want to reiterate our confidence in achieving the $255 million in total annual expense savings that we communicated when we announced the transaction.

All the cost savings are identified, being executed against, and will begin implemented within one year of the deal closing, with a vast majority implemented prior to, or coincident with, the branch and systems conversion over Presidents' Day weekend in the first quarter of 2017.

In total, we plan to consolidate 103 branches, or roughly 9% of the combined post divestiture branch network.

In addition, in connection with our normal periodic review of our distribution network, we will be consolidating nine legacy Huntington branches unrelated to the FirstMerit acquisition during the first quarter of 2017.

Turning to slide 5, let's review operating leverage.

As you would expect, the combined entity has significant positive operating leverage through nine months.

Positive operating leverage remains an important annual financial goal, which we delivered on in 2013, 2014, and 2015, and of course, we expect to deliver again in 2016.

Turning to slide 6, let's look at balance sheet trends.

Average total loans grew 24% year-over-year with growth excluding FirstMerit coming in on 8%.

As you can see from the chart on the left side of the page, the addition of FirstMerit has not had a material impact on the earning asset mix.

The chart on the right side of the page illustrates how the addition of FirstMerit has increased the proportion of low-cost DDA in our funding mix.

Average securities increased 32% year-over-year, primarily reflecting the addition of $7.4 billion from FirstMerit, additional investment in LCR level I qualifying securities, and growth in direct purchase municipal securities in our commercial banking segment.

Our liquidity coverage ratio was approximately 110% at quarter end.

Average total debt increased $2.9 billion or 42% as a result of the issuance of $3.3 billion in senior debt over the past five quarters.

Turning to slide 7, as previously discussed, we have continued to evaluate opportunities to optimize the balance sheet, and while not affecting quarterly average balances, approximately $2.6 billion of total loans and leases comprised of $1.5 billion of auto loans, $1 billion of predominantly non-relationship C&I loans and leases, and $1 billion of predominantly non-relationship CRE loans were moved to loans held for sale at the end of the third quarter.

We're taking these actions to improve risk weighted asset efficiency, and specific to the C&I and CRE assets, to free up capital that was not generating acceptable returns.

Regarding the $1.5 billion of auto loans moved to held for sale, our intention is to securitize these assets in the fourth quarter of 2016.

Let me emphasize that we remain steadfast in our commitment to our auto finance business, including our well-established strategy, which is built upon deep long-term relationships with our core dealer customers and a focus on prime and super-prime indirect lending.

However, we are reducing our indirect auto concentration limit back down to 150% of capital, and we are adopting an operating guideline of 125% of capital.

You might remember that in mid-2015, before we had an agreement in place with FirstMerit, we increased our indirect auto concentration limit to 175% of capital.

Given the larger capital base of the new combined organization, we cannot foresee any circumstance in which we would grow our indirect auto portfolio anywhere close to the 175% of capital.

In addition, with the new 125% operating guideline in mind, we expect to return to the securitization markets on an annual basis going forward.

Moving to slide 8. Our net interest margin was 3.18% for the third quarter, up 2 basis points from the year ago quarter.

This increase reflected a 10 basis point increase in earning asset yields, a 2 basis point increase in the benefit from noninterest bearing deposits, and a 10 basis point increase in funding costs.

Loan yields improved 16 basis points year-over-year, while securities yields declined to 12 basis points.

The increase in funding cost was almost entirely driven by the impact of the debt issuances over the past five quarters, as the cost of deposits was unchanged year-over-year.

On a linked quarter basis, the net interest margin increased by 12 basis points driven by an 11 basis point improvement in earning asset yields and a 1 basis point decrease in the cost of interest-bearing liabilities.

Purchase accounting contributed 12 basis points to the margin in the third quarter.

Adjusting for the impact of purchase accounting, the core net interest margins was 3.06%, or unchanged from the prior quarter.

In addition, similar to what we've seen in recent quarters, one large interest recovery added 2 basis points to the margin during the third quarter.

Finally, as we communicated previously, core NIM will stay above 3% in every quarter of 2016.

Slide 9 illustrates the impact of our capital ratios of effectively deploying capital through the acquisition of FirstMerit.

Tangible common equity ended the quarter at 7.14%, down 75 basis points year-over-year and 82 basis points linked quarter.

Common equity tier 1 ended the quarter at 9.09%, down 63 basis points year-over-year and down 71 basis points sequentially.

Referring to slide 10, we booked provision expense of $64 million, compared to net charge-offs of $40 million.

The high provision expense compared to the prior quarter was the result of a higher level of net charge-offs, organic loan growth and incremental reserves on the legacy FirstMerit portfolio, and excess of the credit mark due to the rate mark partially offsetting the credit mark on certain portfolios.

In addition, there was approximately $10 million incremental loan loss provision expense in the third quarter, associated with the previously discussed movement of loans to held for sale.

Net charge-offs, while higher, represented an annualized 26 basis points of average loans and leases, which remains below our long-term target of 35 to 55 basis points.

The allowance for credit losses as a percentage of loans decreased to 1.06%, reflecting the addition of the FirstMerit loan portfolio to the denominator without additional reserves being added to the numerator due to the credit mark applied through the purchase accounting process.

Non-accrual loan coverage ratio increased to 174% as a result of the continued decline in nonaccrual loans.

On slide 11, the asset quality metrics remain favorable in the quarter as indicated.

The nonperforming asset ratio decreased further reaching its lowest level in two years at 0.72%.

The criticized asset ratio increased modestly to 3.54% but has remained in the 3.5% range for the past several quarters.

Delinquencies were also well-controlled having remained relatively flat for the past six quarters.

Let me now turn the presentation over to Steve.

Thanks, Mac.

Normally at this point in our quarterly discussion I would provide you with an update on our optimal customer relationship, or OCR strategy, however, we have removed those slides from the presentation this quarter given the recent addition of FirstMerit and our inability to produce similar data for legacy FirstMerit customers.

We believe providing OCR data for just legacy Huntington customers would not provide you with a complete picture.

Let me assure you, though, that we remain fully committed to our fair play philosophy and OCR strategy, which is built upon the simple thesis that putting customers first, looking out for their needs and doing the right thing will result in more substantial, long-term customer relationships.

Now for years we've focused on customer acquisition and relationship deepening with our fair play banking philosophy and our OCR strategy.

While this was considered a contrarian approach when we started these actions back in 2009 and 2010, the results paint a picture of resounding success and I want to stress that we are not just seeking relationship growth, but indeed are looking to deepen existing relationships.

Our OCR strategy is also built upon the fundamental belief that we are here to understand and serve our customers needs.

The fair play banking philosophy starts with doing the right thing for our customers with products and services that are simple, clear, and fair.

We couple that with a customer experience designed to fit their needs, not ours.

For us, this strategy has remained consistent since it was put in place in 2010 and it continues to bear fruit.

In light of the recent headlines, some of you have asked about our sales and incentive compensation practices and complaint management, particularly with respect to our OCR strategy.

The focus of our OCR model is on building deep, trusted and lasting relationships, and this is achieved by getting to know our customers, understanding their needs, and helping them meet their financial needs with the appropriate products and services.

Further, Huntington as a Company built upon a distinguished legacy of superior customer service.

Our fair play philosophy and welcome culture, are built upon the premise and promise of doing the right thing for our customers.

As you'd expect, given the investor meeting and regulatory interest in this matter, we've undertaken a detailed review of our practices, policies and procedures for any signs of misalignment of incentives or other areas of risk or concern.

And while the review is ongoing, to date we have not uncovered any systemic cultural or operational areas of concern.

We will likely refine some of our monitoring, but we do not anticipate any material changes to our practices or procedures, and certainly not to our overall OCR strategy.

Moving to the economy, slide 12, contains what we feel to be some of the more meaningful economic indicators for our footprint.

The bottom left chart illustrates trends in the unemployment rates across our now eight core midwestern states.

As you can see, the majority of our footprint remains at or below the national unemployment rates relative to the national average with Ohio, Michigan, Indiana, and Wisconsin particularly showing resilience this past quarter.

The charts on the top and bottom right show coincident and leading economic indicators for the region.

The bottom chart, which shows leading indexes for our footprint as of August, show that all eight states in our footprint expect positive economic growth over the next six months.

Slide 13 focuses on trends and unemployment rates in our largest metropolitan areas, and many of the large MSAs in the footprint remain at or near 15-year lows for unemployment at the end of August.

Also notable, 11 of the top 15 MSAs experienced declining unemployment rates in the last three months.

The auto industry is still strong and is a major economic contributer within our footprint, but the housing markets are also strong.

Labor market in our footprint has proven to be strong in 2016 with several markets, such as here in Columbus, where we are at structural full employment.

We are seeing wage inflation in our expense base and our customers are, too.

State and local governments continue to operate with surpluses, Ohio, Indiana and Michigan continue to outpace overall US growth since the recovery.

We remain confident in our footprint midwest economies, based on the sustained job growth and economic production since the recovery that began after the great recession.

Turning to slide 14.

I'd like to give you some closing remarks and important messages.

We remain focused on delivering consistent through the cycle, shareholder returns.

The strategy entails reducing short-term volatility, achieving top-tier performance over the long-term, and maintaining our aggregate moderate to low risk profile throughout.

As you heard Mac mention earlier, the acquisition and integration of FirstMerit provides what we believe is an opportunity to achieve significant cost savings and improve our overall efficiency.

We're committed to and progressing as planned toward realizing our targeted $255 million of annual cost savings from the acquisition.

We continue to win new customers through a strong and recognizable consumer brand with differentiated products and superior customer service.

The new customers and dynamic markets offered from the FirstMerit acquisition provide a deeper and more vibrant pool to deliver our value proposition and add customers and deepen relationships.

We have invested and will continue to invest in our businesses, particularly around enhanced sales management, mobile and digital technologies, data analytics, and optimizing our retail distribution network.

Importantly, we plan to continue to manage our expenses appropriately within our revenue outlook.

We always like to include a reminder that there's a high level of alignment between the Board, Management, our employees, and our shareholders.

The Board and our colleagues are collectively among the largest shareholders of Huntington.

We uphold to retirement requirements on certain shares and are appropriately focused on driving sustained, long-term, performance.

We're highly focused on our commitment to being good stewards of shareholder's capital.

Looking forward to full-year 2016 results, excluding the impact of significant items, we expect total revenues to increase 16% to 18% and non-interest expenses to increase 13% to 15%.

We expect to deliver positive operating leverage for the fourth consecutive year.

We expect asset quality metrics to remain near current levels, including net charge-offs remaining below our long-term target of 35 to 55 basis points.

Now consistent with our historical practice, we anticipate we'll provide initial expectations for 2017 at an investor conference later this quarter.

Finally, we are very pleased with the smooth integration process with FirstMerit, which we acquired on August 16.

The divestiture of 13 branches, primarily in the Canton, Ohio market, will occur this quarter.

We've completed the onboarding and initial training of our new colleagues and fully implemented the organizational changes for the combined entity that we announced last summer.

103 branch consolidations will occur coincident with the branch conversion in February of 2017.

Our systems conversion planning efforts continue to progress as our IT teams have completed all product and data mapping and are now managing system testing and preparing for mock conversions.

So I'll now turn it back over to Mark so we can get to your questions.

Thank you.

Operator, we will now take questions.

We ask that as a courtesy to your peers, each person ask only one question and one related follow-up.

And then if that person has additional questions, he or she can add themselves back into the queue.

Thank you.

(Operator Instructions)

Your first question comes from the line of Scott Siefers.

Please state your firm.

Your line is open.

Good morning, guys.

Quick question on the provision, Mac, I appreciate the color on the roughly $10 million or so provision that might've been kind of unusual related to the move of loans for held for sale, but I was hoping you might be able to give just a little more color on the rationale behind such an elevated provision and whether or not -- I guess if we were to exclude the $10 million going forward, if something in the $55 million range represents a new, perhaps more elevated run rate, than has been the case more recently.

So I guess really any color that you can provide, please.

Sure, Scott this is Dan.

So there's a couple things going on in the quarter.

First, we did have higher charge-offs than what we have been experiencing, although still below our long-term expectation, so replenishing the $40 million of charge-offs was one piece of that.

Second, as you've already noted, we had the movement of loans to held for sale.

We also had the organic originations from FirstMerit post closing, so the new loans that are generated have allowance associated with them.

And then we did have a portfolio where we had a positive rate mark that offset the credit mark, so it was recorded at a premium, so we have allowance billed there.

So I wouldn't say that this is a situation where this is the new normal.

I think this was a bit of an outlier and I think on a go forward basis, we will have provision expense that is more in-line with charge-offs and with an allowance for some growth.

I also would note that in the quarter, charge-offs were up partially due to the fact that we had lower recoveries in the C&I portfolio.

That added about $5 million of additional charge-off over what we have been experiencing, so we had quite a number of factors that would have resulted in the higher provision this quarter.

Scott, this is where we see the volatility we've been talking about in terms of charge-offs because of the low levels that we are running at.

As Dan mentioned, it's a credit or two on the commercial side without the recoveries to offset that, so clearly, the volatility is as we expected and I would say that there is probably about $12 million, that Dan mentioned, associated with the loans held for sale and the day two FirstMerit provision for the portfolios that he mentioned that had higher interest marks.

Scott, just one other comment, I think, just as you are looking at a go forward.

The asset quality metrics in terms of the criticized, we had a reduction in non-accruals, et cetera.

So very steady delinquencies, so there's nothing out there that would indicate that we expect a turn here, so just in terms of you thinking about provisioning going forward.

Okay.

That's good color.

Thank you, guys, very much.

Your next question comes the line of Bob Ramsey.

Please state your firm.

Your line is open.

Good morning, guys.

With FBR.

Wanted to touch base on net interest margin.

Is the 11 basis points some sort of one-time thing from accelerated payoffs on acquired loans, or is this more the level that will just gradually amortize lower over time?

And then maybe could you tell us what the margin was in the month of September, so we can think about a starting point headed into the fourth quarter?

So, Bob, I would think about that core margin as being 3.04%, right, or 3.06% absent the purchase accounting impact and it's 2 basis points for the interest recovery that we had in the quarter that added 2 basis points to it.

There probably was about $4 million or $5 million in the quarter related to accelerated accretion for early payoffs and those types of things, but I think -- thinking about the rest of it from a purchase accounting perspective and thinking about projecting that forward would be the right way to think about it.

We are comfortable with the core margins staying above 3% for the remainder of the year, and I think it's also important to note that on a core basis, FirstMerit was accretive to the core margin.

Simply because of asset mix and the fact that they brought more DDA to the funding mix as well.

Okay.

And I guess given the full quarter impact next quarter, should we really be thinking about something above the 3.04% on a core basis?

And do you know what the core was at the end of the quarter as we head into the fourth?

Yes.

I think 3.04% is the right way to think about the core.

The purchase accounting piece is a bit difficult because of what could happen from an accelerated accretion perspective, but I think you're pretty safe thinking about that core at 3.04%.

Okay.

Great.

Thank you.

You next question comes from the line of Steven Alexopoulos.

Your line is open.

Please state your firm.

JPMorgan.

Good morning, everybody.

I wanted to first follow up on Steve's comments regarding the customer acquisition and cross sales strategies being under review.

Do you currently use sales quotas in the incentive comp calculation for branches front-line folks and you think you'll need to more broadly change the incentive systems?

We don't anticipate any meaningful change to the incentive systems.

There are certain things that we measure top of the house that are not pushed down at the account level so -- or at the officer level, so that would include, we focus our branches and officers on revenue not product specific or product required sales, Steven.

So we don't anticipate any meaningful change on the incentive plans from where we are now, and I do think we'll put more oversight and analysis in, but we've already been doing a fair amount of that.

Okay.

That's helpful.

And then maybe a follow-up.

A lot of moving pieces to the loan balances in the quarter, can you give us a sense of what organic loan growth looked like in the quarter if we just think about Huntington on its own, maybe adjusting out some of the movements into held for sale?

So, Steven, it would be about 8% year over year.

And it would be the categories that we've talked about previously that are driving the growth.

It's indirect auto, it's equipment financing, and lease on the Huntington side.

I think we continue to see good pipelines on the commercial side of the business, and I think resi probably had some growth in the quarter as well.

Those are the categories that have been good for us this year, and 8% is not out of bounds.

Maybe a little bit higher than where we've been so far quarter by quarter this year.

Pipelines look strong at this point as we go into the fourth quarter in those categories, Steven, as well.

Okay.

Perfect.

Thanks for the color.

Your next question comes from the line of Ken Usdin.

Please state your firm.

Your line is open.

Thanks, good morning.

From Jefferies.

Mac, I was wondering if you could walk us a little bit through the landing point up for the balance sheet?

Meaning that it looks like you've got a whole bunch of pending and future loan sales, you've got the divestitures, you've got core growth going on, and so, where do you see pro forma ending up?

Maybe as a fourth quarter start point, just so we can understand once you've moved through some of this additional cleanup underneath as a base.

Yes, I'll see if there might be a page we can direct you to in the deck.

If you take a look at page 30 of the slide deck, might be the best place to look, it's September 30 balance sheet.

Just on the asset side, and you can see that total commercial loans are about $35 billion at a spot basis, consumer about $31.4 million and total loans and leases are about $66 million.

Right.

So with the pending sales, though, does that -- the loans are in the -- already moved to the held for sale, right?

So period end, we should think about that whole loans for sale bucket going away and then use the what's left as the new base for loans?

Exactly.

You can see loans held for sale about four or five lines down there at $3.4 billion, and so those were already taken out?

Yes.

That's fine.

And just in terms of the rest of liquidity and any changes to your funding mix going forward.

Do you anticipate continuing to build the securities book or is that now on a pro forma basis also in the right zone?

The securities book will go up a bit from here because we are going to replace the auto loans with zero weighted risk weighted assets.

Think about maybe another $2 billion or so in securities.

So that will come on -- some of it has already come on.

Some will come on in the fourth quarter as well.

Okay.

From a funding perspective, for the other loans that we're going to sell, we're going to pay down funding sources.

I wouldn't see any material change in the way we're going to fund the balance sheet.

Ken, some of the puts and takes on the restructuring are on slide 7. There's an optimization.

Is that good, Ken?

Give you what you need?

Yes.

I think so.

Thank you.

(Operator Instructions)

Your next question comes from the line of Ken Zerbe.

Your line is open.

Great.

Thanks.

Good morning.

Just have a question on the auto side.

Obviously, you reduced the concentration limits that you guys want to hold.

You want to do more securitizations.

How much of that relates to the environment that we are in for auto?

Like, are you seeing any deterioration in the broader industry auto credit, that's leading you to get more conservative?

Thanks.

Ken, this is Dan.

We commented on the past that we observe what's going on in the marketplace, but it really doesn't impact our business model or our performance so we have not changed our view on the auto portfolio at all.

As we reference in the slides, we continue to show our history of performance and originations.

We haven't moved off that.

We don't have a change in our go forward view of what we believe we are going to experience.

So while there may be activities going on in the market that are of concern because of our prime, super-prime focus, because of our strong origination scores, absence of risk layering, we have not changed our view at all with regard to the quality of the portfolio.

Okay.

That helps.

And then just to be clear, on the comment you guys made -- if I understood the prepared remarks correctly, I thought I heard you say you are reducing the limit to the 150% because, sort of quote, you can't originate enough to get you up to 175%.

I just want to make sure I fully understand the rationale of why your limits are going down.

Thanks.

So, yes, the 175% was put in place before we had an agreement with FirstMerit.

It was put in place on a smaller capital base, and we define capital as tier 1 capital plus the allowance.

So there really wasn't an ability for us to get to the 175%.

We are not going to be a national player in auto.

We like the geography that we're in.

We like the business model that we have in place.

We are not going to change the underwriting or the risk profile, and quite frankly, as we bring on FirstMerit, we have other opportunities to invest capital at higher returns.

So that's primarily why we did it.

We've always been at 150% historically, and we just feel that operating at 125% gives us flexibility to perhaps go over 125% from a timing perspective if we're getting the securitization done and we don't like the market conditions, we can hold a bit above 125% until we like the market conditions.

So that's the way we are thinking about it.

All right.

Great.

Thank you.

(Operator Instructions)

There are no further questions at this time.

Okay.

The third quarter was highlighted by the closing of FirstMerit acquisition and our continued strong financial performance.

With sound fundamentals in place, we're well-positioned for solid performance in the coming quarters.

And our strategies are working, our execution remains focused and strong.

We expect to continue to gain market share and improve share of wallet.

The addition of FirstMerit's solid balance sheet, strong credit performance, valuable customer base and dynamic new markets provide opportunity to further augment or accelerate the achievement of our long-term financial goals.

Finally, I want to close by reiterating that our Board and this management team are all long-term shareholders.

Our top priority is integrating FirstMerit and growing our core business while managing risks, reducing volatility, and driving solid, consistent, long-term performance.

So thank you for your interest in Huntington, we appreciate you joining us today and have a great day.

This concludes today's conference call.

You may now disconnect.